Despite a positive long-term outlook, the food and drink sector in Kazakhstan is set to experience a number of difficulties in the short-term – as consumer confidence tumbles along with the economy. As discussed in the recently published Kazakhstan Food & Drink Report for Q309, a number of key players in the country’s dynamic drinks sector have already reported major drops in their profits, as consumer confidence has taken a hit.

The substantial devaluation of the Kazakh tenge earlier this year has revived concerns of an escalation in inflationary pressures. While we believe that headline inflation will likely edge higher by end-2009, we stress that the destruction of domestic demand and decline in global commodity prices, will prevent inflation returning to its mid-2008 highs. Amid the continued escalation of the global financial crisis, the Kazakh government has unveiled a series of support initiatives aimed at cushioning the blow from tumbling asset prices and slowing growth. While these measures will go some way in easing the dislocation on households and firms posed by the global credit crunch, we caution that domestic demand will nonetheless collapse in 2009, unemployment will surge and real wealth will fall, with the net effect dragging the economy into recession.

In April, two key players in the country’s drinks industry reported major drops in their 2008 profits. Efes Breweries International (EBI) reported a 8.6% drop in its 2008 operating profit, which fell to US$73.6mn. This occurred despite a 24.1% rise in net sales, and a 5.5% rise in volumes. Meanwhile, Coca-Cola Içecek (CCI) reported that their full-year net profit for 2008 dropped 47% year-on-year (y-oy), again, despite a rise in sales in both value and volume. Sales in Kazakhstan, which is the largest contributor to the region’s volume at 52%, were reported to be a major disappointment and far behind expectations.

However, despite the spate of bad news, some companies are continuing to move forward with their investments, thanks to the strong long-term potential of the Kazakhstani drinks sector. Danish brewer Carlsberg, which is already the market leader in the country’s beer sector, announced in February that it had reached an agreement with Mexican brewery Grupo Modelo to expand their cooperation agreement to include nine new markets, including Kazakhstan. Under this agreement, Carlsberg’s subsidiaries in these various countries will distribute the Corona Extra brand, which is produced by Modelo. Carlsberg Breweries will also hold the exclusive rights to import, promote and sell the Corona Extra brand in these markets.

Beer remains the most popular alcoholic drink in Kazakhstan – the beer market has experienced booming growth in recent years. With competition in this sector heating up, not just in Kazakhstan, but also throughout the region, brewers who can afford to do so are shoring up their investments. While this current period is undoubtedly difficult for food and drink operators – with alcoholic drinks sales forecast to increase by 97.3% in value terms between 2008 and 2013 – the longer-term outlook for the sector is still positive.